Salem Media Group Inc (SALM) 2011 Q1 法說會逐字稿

Hello and welcome to the Salem Communications first quarter 2011 results conference call. Today's call is being recorded. I would now like to turn the call over to Evan Masyr, Senior Vice President and Chief Financial Officer. Please go ahead, sir.

Welcome and thank you for joining us today on our first quarter earnings call. As a reminder, if you get disconnected at any time, you can dial into 913-312-1434 or listen from our website at www.Salem.cc. I'm joined today by our Chief Executive Officer, Edward Atsinger, our President of the radio division, David Santrella, and our President of the non-broadcasting division, David Evans. We'll begin in just a moment with our prepared remarks. Once we're done, the conference call operator will come back on the line constructing how to submit questions.

Please be advised that statements made on this call related to future plans, events, financial results, prospects or performance are forward-looking statements as defined under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those anticipated as a result of certain risks and uncertainties including but not limited to market acceptance of Salem's radio formats, competition in the radio broadcast, Internet, and publishing industry and new technologies, adverse economic conditions and other risks and uncertainties detailed from time to time in Salem's reports on forms 10-K, 10-Q, 8-K, and other filings filed with or furnished to the Securities and Exchange Commission.

Listeners are cautioned not to place undue reliance on these forward-looking statements which speak only as of the date hereof. Salem undertakes no obligation to update or revise any forward-looking statements to reflect new information, changed circumstances or unanticipated events. This conference call also contains non-GAAP financial measures within the meaning of Regulation G. Specifically, station operating income, EBITDA, and adjusted EBITDA.

In conformity with Regulation G, information required to accompany the disclosure of non-GAAP financial measures including a reconciliation of such non-GAAP financial measures included in this conference call to the most directly comparable financial measures prepared in accordance with GAAP is available on the investor relation portion of our website Salem.cc as part of the current report on form 8-K in an earnings release issued by Salem earlier today. I would turn the call over to Edward Atsinger.

Thank you, Evan. Thank all of you for joining our first quarter 2011 earnings call. As is our normal custom, I want to talk about the highlights that took place in the quarter, and then I'll turn the call back over to Evan who will drill down into the specifics of the first quarter performance on financial numbers, and then take a look at the second quarter and give you some guidance.

We had a solid quarter of top-line revenue growth. Total revenue was up over 7% compared to last year. The increase was comprised of a 3% growth in broadcast revenue, a 38% growth in Internet revenue, and a 17% growth in publishing revenue. The two key areas that I want to focus on in the broadcast revenue side, first, local spot revenue was up 9% over last year.

Most of you know that as we came out of the recession most of the growth was in the national area, national spot area, that's a less significant area for us. 80% of our advertising revenue is local, so this improvement in local spot is an encouraging note for us that our recovery is taking hold. The other area that was important was our block program revenue which was up 7% for the quarter. Block makes up about 35% of our total revenue, so this is an important component for us.

While we did see some, we had implemented some modest rate increases for 2011, the improvement was being driven primarily by significant increase in demand for block programming time, which has pushed our available inventory to a very low level, which is also good news. Our expenses for the quarter were high, up 10%, but inline with our guidance and expectations. As mentioned on our last call, we had some unique circumstances that contributed to this increase.

First, we had operating expenses related to Internet acquisitions that we made during 2010 that were not around during the first quarter of last year. Additionally in the first quarter of 2010, we received a large payment from a significantly past due account that had the result of reducing our bad debt expense in last year's first quarter by $650,000, so that in comparison with this quarter was a bit of an anomaly. You will see from our second quarter guidance that expenses are beginning to moderate.

I would like to also mention the fact that two station sales took place during the first quarter. On January 6, we closed on the sale of KKMO AM in Seattle for $2.7 million, and on February 25 we closed on the sale of KXMX AM in Los Angeles for $12 million. Also, on March 14, we consummated our acquisition of what is now WBZF AM, Pawtucket, Rhode Island, which is a Providence Rhode Island market, for $550,000.

Finally, on March 28, we acquired WorshipHouse Media for $6 million. WorshipHouse Media is an eCommerce website providing multimedia researches for use by churches. Our rational for acquiring WorshipHouse Media is that the use of multimedia resources in churches is a growth business. It's been dramatically increasing over the last several years and continues to expand at a rapid clip, and that is a kind of business that works very well for our marketing and promotional platform and allows us to use all of our assets to drive revenue, so it fits our niche, a very nice acquisition from our prospective.

In connection with the acquisition of WorshipHouse Media, we formed a new church products division that also includes SermonSearch.com, ChurchStaffing.com and ChristianJobs.com, bringing these church product sites together with WorshipHouse Media made a lot of sense. They'll now be lead by a single manager and we'll integrate those resources in a way that will improve the efficiency and produce higher levels of revenue. Looking at our Internet business as whole, revenue in the first quarter grew 38% from $6.2 million from $4.5 million last year.

The growth is driven by our acquisition of HotAir.com and GodTube.com, in addition to the organic growth from our existing web properties and our radio station websites. Both the Hot Air and God Tube acquisitions are proceeding extremely well with page views ahead of our projections. With that, I will now turn the call over to Evan for a discussion of first quarter results and guidance for second quarter.

Thank you, Ed. For the first quarter, our total revenue increased 7% to $51.8 million. Operating expenses on a recurring basis increased 10% to $44.3 million. And adjusted EBITDA decreased 4% to $11.5 million. Net broadcast revenue increased 3% to $42.7 million, and broadcast operating expenses increased 7% to $27.8 million, resulting in a decrease in station operating income of 3% to $14.9 million.

On a same station basis, net broadcast revenue increased 4% and SOI decreased 4%. These same station results include broadcast revenue from 85 of our radio stations and our network operations, representing 98% of our net broadcast revenue. Let's now take a look at our same station performance by format.

We have 39 of our radio stations programmed in our foundational Christian teaching and talk format and these stations contributed 46% of our broadcast revenue. Same station revenue on this format increased 2% for the quarter. Revenue from our 11 contemporary Christian music stations increased 19% for the first quarter on a same station basis and contributed 21% of our total broadcast revenue.

Our 22 news talk stations had a 5% increase in revenue for the quarter on a same station basis, and overall these stations contributed to 16% of our broadcast revenue. Revenue from our Internet business increased 38% to $6.2 million and our Internet operating income increased to $1 million. Our publishing revenue increased 17% to $2.8 million while operating income was essentially break even.

As of March 31, we had $270 million of our nine and 5/8 Senior Secured Second Lien Notes outstanding and had $19 million drawn on our bank revolver. We were in compliance with the covenants of our credit facility and bond indenture. The credit facility leverage was 5.55 versus a compliance covenant of seven. On May 2, we launched our redemption of $17.5 million of our nine and 5/8 Senior Secured Second Lien Notes at a price of 103%.

We expect this redemption will close on June 1, and this will bring our total to $47.5 million of debt redeemed in 18 months and we look forward to redeeming more in the future as we continue our de-leveraging efforts. For the second quarter of 2011, we are projecting total revenue to increase 5% to 7% over the second quarter of 2010 total revenue of $53.1 million. We are also projecting operating expenses to increase four to seven percent as compared to the second quarter of 2010 operating expenses of $43.1 million.

And this now concludes our prepared remarks and we would like to answer any questions that you may have. Operator.

Thank you. (Operator Instructions). We'll take our first question from Bishop Sheen with Wells Fargo Securities.

Hi everyone. Thank you for the very helpful update. So Edward and Evan, just assume I'm your poster child attention deficit disorder investor. Tell me again why it's going to look a lot better for the core radio group as we work our way through the year because when I look at the first quarter, I gasp, and I know you've explained it and I'm asking you to be kind and gentle and patient and explain it again.

Bishop, are you referring to the guidance with respect to expenses and how that's decreasing over time?

Yes.

Okay. Part of what's driving those expenses, Ed mentioned in the first quarter last year we did have a rather large collection that was a reduction in bad debt expense last year of about $650,000, so that had an impact on our expenses in the first quarter this year as an unfavorable comparison. The other thing that is happening is with we acquired HotAir.com, GodTube.com, and SamaritanFundraising.com all at various times during 2010. As we anniversary those acquisition dates expenses are more equal because you have expenses, for example in the first quarter of 2010 of 2010, of 2011, that were not around in the first quarter of 2010 due to those acquisitions.

That I get, but that's not, and I just need to clarify that. The Hot Air is not really reported in the core radio group. Is it? I thought that was more in the Internet asset.

Correct. I thought were you talking expenses overall.

I apologize, let me clarify. I was looking, because you guys do a great job for breaking everything up, so I was looking at what is implied on an expenses for the broadcast group. Because we see that the revenues are up, but the operating income is down so the culprit can only be expenses?

Correct.

That's where I was focused.

Right.

The $650,000 bad debt of credit was entirely in that core broadcast group, so that was one factor. Had that been reversed it would have been substantially lower and when we have a comparison next year in going forward it will be reversed. We're trying to manage expenses. I think we're doing a fairly good job. There's lots of pressure now to make some folks whole. We've cut expenses to the bone in 2009 and 2010 when we were refying our debt, so there's a little pressure now to make some adjustments, so I think we've worked through most of that.

Bishop, it's Dave Santrella. We also in Q1 of 2010 held on to our marketing powder. We weren't sure really how the year was going to shape up so we held off on some marketing. We did do some marketing in Q1 of 2011 that was not a part of comps for 2010.

We won't necessarily keep up that level of marketing throughout the year, so again I think expenses will continue to moderate.

Okay. So I mean (inaudible) this from other companies, we don't all work in a vacuum, so people are pointing to the message of don't worry about it, the second half is going to feel a feel a lot smoother than the first half and I don't want to put words in your mouth, but is that what you're feeling or thinking as well?

Well, I'm not sure I would necessarily comment on the second half of the year, that seems so far away. But certainly when we compare second quarter to first quarter we are seeing that the expenses are moderating more and we had a decline of 4% in EBITDA this year, or this quarter. Not exactly sure what Q2 will turn out, but if you look there is a chance that those declines get smaller and we start getting into positive EBITDA territory as the year progresses.

Okay.

The guidance that he gave you, Bishop, for second quarter, we're not going beyond second quarter, but the guidance we gave you, we expect revenues to be up between 5% and 7%, and we expect expenses to be up between 4% and 7%. Obviously, it's a pretty broad range. We think we'll be better than the 7%, so we feel pretty good about second quarter. Don't want to imply about third or fourth.

That's fair enough. I'm not trying to put your feet on the coal. I have one other question and it regards the optional redemption. You were very good in walking us through this on the last call so I'm going to ask to you do it again. So this would be the first redemption of calendar 2011, and so the way the math and the timing works now, the next redemption cannot really happen until October?

The next redemption could not happen until December 1. December 1 and it would be limited to $12.5 million.

Okay.

So it's $30 million in any 12-month period so you have to look back at what you've done and you can only do two redemptions in any 12-month period.

Got it.

So if we are able to redeem $12.5 million more on December 1, then our next opportunity to do anything would be June 1 of 2012. If we can't redeem the whole $12.5 on December 1, let's say $10 million, we could redeem $2.5 million the next month if we wanted to.

No, you can only do two. But what you would be able to do it the following June, you wouldn't be limited to $17.5 million you could do (inaudible). So you have to kind of look back and say in any 12-month period I can't do more than $30 million and I can only do two redemptions.

Right. But you guys run more regularly and more dependable than most airlines, so that tells us what we need to know. That's it for me. I'm going to pass it along. Thank you.

Alright, thank you, Bishop.

We'll take our next question from Anil Gupta with Imperial Capital.

Hi, guys, thanks for taking our questions. I think you said local spot was up 9% year-over-year in the first quarter. It seems like a lot of other broadcasters out there are pacing a little bit below this level. I wanted to see if you could talk about what you think is driving the local growth, if it's more of a rate issue or if it's an inventory type of advertiser, et cetera?

Really it's a couple of things. First off, we have seen a greater number of local avail based transactional business. Automotive has been more robust in Q1 then it had been in prior Q1. But then in addition to that, as Ed mentioned earlier, most of the sales that we make are direct in nature. We don't really rely on a lot of transactional business, so our folks are out calling on direct business all the time and I think as the economy has improved, those folks have been more ready buyers.

I reminded folks on the last call that as the agency business increases, for instance in the national arena, at some point the local direct advertiser has to advertise because he's competing with that national business. The national tire guy that's advertising is in direct competition with the local tire guy, so suddenly that local guy has to do something otherwise he is going to get his clock cleaned. So he starts to advertising. That's where our strong suit is. That's where we do well is with direct local advertisers.

Okay, great. The other question I have, can you give us some color as to what sort of price increase, if any, were you able to achieve block business in the first quarter? If I remember correctly, I think a good portion of the block contracts are negotiated in the first quarter of the year; is that right?

I think it's going to be in the neighborhood of about 3% all in. That's close, take that, that's pretty close.

Somewhere in that neighborhood.

Okay. And then one more question for you. Was there any cash expense, I mean cash interest expense in the first quarter?

There was. It was a small amount related to interest on our revolver. I think it's actually on one of the tables in the earnings release here.

Okay.

No, it's not. It's actually in the 10-Q that we just filed, I don't have that on me tight now, but it's a small amount.

If the Q is filed, I'll look at it in there. The last question was the M&A landscape on both broadcast and non-broadcast, can you give us some color as to what type of environment you are seeing out there? Any color you can give us in terms of revenue or EBITDA you're expecting from the WorshipHouse deal?

Color on M&A activity, it's just sort of what you're seeing, what we're all seeing. It's nothing extraordinary, there just seems to be a little firming up. A little firming up in demand, and therefore, a firming up in prices but it's still pretty sluggish. We're not aggressively out there trying to acquire things at this point so I really can't give you any color other than that, that it's pretty much as it has been, although some firming in pricing, a little bit of improvement in demand.

Okay, great. And then any commentary can you give us about WorshipHouse in terms of economics there?

Yes. WorshipHouse was founded as a business five or six years ago. We acquired a pretty nicely growing business, both in terms of revenue and profit, so the last 12 months profit on date of acquisition was approximately $700,000 against a purchase price of $6 million. Those cash flows come from revenues of between $3 million and $4 million. Business is starkly top-line growth has been around 10% growth in revenue because as I've mentioned, the use of multimedia by churches is a growing business so we expect to see continued growth, continued robust growth in revenue, particularly with the radio and Internet marketing platform that Salem has, and we expect the profit growth to follow from that continued revenue growth.

Okay, great. Real quick, the last one, the CapEx outlook for the year. I think on the last call you guys had around $7 million to $8 million for the year, is that pretty consistent with what you're thinking ?

That's still pretty consistent with what we expect 2011 to be. And I have an answer for you, cash interest was $354,000 for the quarter.

Excellent. Thanks very much.

(Operator Instructions). We'll take our next question from Conrad Chen with Crescent Capital.

Hey, guys. Just on your revenue guidance for Q2, I think some of your peers have commented that they saw weakness in trends in March and then heading in to early in the second quarter. Just curious as to whether you had seen that and whether your guidance is based on more later in the quarter growth anticipation?

You say that some of them have mentioned a slowing of growth in March?

Yes. I think some of your peers said they saw trends weakened in March, and April and May were a little soft, too.

Dave, you can take a shot at that if you'd like, but I don't think we have necessarily seen that same thing.

I'll tell you, April paced around 7% for us.

We have actually seen a pretty strong growth so far in April and a promising start to the first week of May as well.

I think on the radio side, Q1 and Q2 are probably pretty consistent. On the Internet side because of the acquisition of WorshipHouse Media, growth will be larger in Q2 than in Q1, but that is driven by the acquisition.

Okay. And then the debt repayment during the quarter, I was a little surprise that you guys had so much. Was that mostly from the proceeds of the asset sales?

It is from proceeds from the asset sales, net of acquisitions, and from free cash flow.

Okay. And you guys planning on selling any more assets this year?

Well, no, I don't think we necessarily plan on it, but we haven't planned on some of the others. It's possible that we will. And we have some non-strategic assets that we would consider selling if the price were attractive enough. We do have some assets that could be sold, but we're not actively marketing anything.

Okay. And I assume this bond redemption is going to be funded with a draw on the revolver?

That's correct. As we have cash, for example, from the sale of KXMX, the first thing I did immediately was pay down the revolver knowing that we going to redraw on it when we did this redemption. But to more effectively manage our interest expense I take any excess cash and pay down that revolver, so we will draw on that.

Okay, great. Thanks, guys.

Operator, are you still there?

It appears there's no further questions at this time. Mr. Atsinger, I would like to turn the conference back over to you for additional closing remarks.

Let me thank everybody for joining us. We look forward to visiting with you again in about three months.

That concludes today's conference. Thank you for your participation.